Archive for the ‘Environmental Coverage’ Category

The Insurance Law Blog has been following decisions related to hydraulic fracturing for potential impacts on insurance coverage issues. As we previously reported in May 2013, the New York Supreme Court, Appellate Division, upheld two zoning ordinances passed in 2011 by the Towns of Dryden and Middlefield, New York, which prohibited the exploration and production of natural gas and petroleum – including hydraulic fracturing, or hydrofracking. On June 30, 2014, the New York Court of Appeals affirmed the Appellate Division’s ruling finding that the New York Oil, Gas and Solution Mining Law’s (“OGSML”) supersession clause does not preempt “home rule” authority vested in the Towns to regulate land use.

In Matter of Mark Wallach, as Chapter 7 Trustee for Norse Energy Corp. USA, v. Town of Dryden, et al., and Cooperstown Holstein Corp., v. Town of Middlefield, – N.Y.3d –, (June 30, 2014), the New York Court of Appeals affirmed the Appellate Divisions’ May 2013 decision upholding summary judgment in favor of Dryden and Middlefield which passed zoning ordinances banning natural gas and petroleum production operations. The ordinances were established in 2011, and subsequently challenged by natural gas exploration companies alleging that the ordinances were preempted by the OGSML which, among other things, regulates the production and storage of oil and natural gas. The trial courts disagreed with the production companies’ preemption arguments, and granted cross-motions for summary judgment in favor of the Towns because the zoning ordinances in question only limit the use of land and do not attempt to regulate the manner in which oil and gas is extracted under the OGSML. The Third Department affirmed in May 2013, finding that the OGSML does not expressly preempt the local zoning regulations which did not limit the methods and means of mining proscribed by the OGSML, but merely limited where mining could occur. Thus, the local zoning ordinances at issue were reasonable uses of the Towns’ home rule powers established pursuant to Article 9 of the New York Constitution.

In its opinion, the Court of Appeals affirmed finding that the OGSML’s supersession clause does not preempt the Town’s home rule power to regulate industrial land use, preserve a communities’ characteristics, and protect the health, safety and welfare of the community as a whole. In particular, the Court of Appeals rejected the appellants’ arguments based on a three-pronged test previously discussed in Matter of Frew Run Gravel Prods. v. Town of Carroll, 71 N.Y. 2d 126 (1987). In Frew Run, the Court of Appeals found that the Town of Carroll’s ordinance which restricted mining operations from a certain portion of the Town did not conflict with the Mined Land Reclamation Law (MLRL). The Court of Appeals analyzed the plain language of the MLRL’s supersession clause, the statutory scheme of the MLRL as whole, and the MLRL’s legislative history to determine if the ordinance interfered with the MLRL. The Court of Appeals found that the MLRL did not preempt a town’s ability to regulate land use because the New York Legislature passed the MLRL to regulate only the means and methods of extractive mining operations, and not where those operations could occur.

Here, the Court of Appeals applied the test in Frew Run and found that the plain language of the OGSML’s supersession clause, the statutory scheme as a whole, and the legislative history only focus on regulating the means and methods of gas, oil, and mining operations and not the location of where such operations could occur. Therefore, the OGSML does not preempt the Towns’ home rule power to regulate land use and exclude gas and oil production operations.

The Court of Appeals also rejected the appellants’ secondary argument. In this regard, the appellants argued that land use ordinances may only limit hydrofracking operations from certain portions of the Towns (i.e., residential areas) because a complete ban would run afoul of the OGSML and essentially, regulate the oil and gas industry. The Court of Appeals disagreed, relying on Matter of Gernatt Asphalt Prods. v. Town of Sardinia, 87 N.Y.2d 668 (2006), a decision that follows Frew Run. In Gernatt Asphalt, the Town of Sardinia amended its zoning ordinance to prohibit all mining operations following the New York State Legislature’s revision of the MLRL in accordance with Frew Run. As a result of the Town’s amendment, a mining operator challenged the prohibition based on the MLRL’s supersession clause. The Court of Appeals rejected the mining company’s challenge, finding that nothing in Frew Run or the MLRL obligates a town to permit mining just because minerals are available to be mined as a natural resource.

The Court of Appeals found that the restrictions at issue here are no different in substance to the ordinances passed by the Town of Sardinia and upheld in Gernatt Asphalt. In addition, Dryden and Middlefield acted reasonably because they each studied the potential negative effects that hydrofracking may have on the character of their respective communities prior to enacting the ordinances.

Sedgwick tracks local and national developments in hydraulic fracturing in its newsletter, Hydraulic Fracturing Digest. Prior issues can be found here.

For readers following the developments in hydraulic fracturing and the potential insurance coverage implications, we have been tracking litigation in New York involving zoning ordinances passed by the Town of Dryden and the Town of Middlefield, and most recently reported on the litigation in our Hydraulic Fracturing Digest in January 2014. Readers may recall that an appellate court decision issued on May 3, 2013, had upheld the zoning ordinances prohibiting the exploration and production of natural gas and petroleum. Today, the New York Court of Appeals, the state’s highest court, affirmed the decisions. We are reviewing the court’s decision and will provide further analysis in the Hydraulic Fracturing Digest.

In KeySpan Gas East Corp. v. Munich Reinsurance America, Inc., et al., — N.Y.3d –, (N.Y. June 10, 2014), a case involving two environmental damage claims, the New York Court of Appeals reversed an appellate decision which found that three excess insurance carriers had waived their right to disclaim insurance coverage for failure to timely raise late notice as an affirmative defense, citing N.Y. Insurance Law § 3420(d)(2).

KeySpan arises out of the clean-up and remediation of two former manufactured gas plants (“MGP”) located in Bay Shore and Hempstead, New York which were operated by the Long Island Lighting Company (“LILCO”). LILCO initially notified its excess insurance carriers of potential environmental liabilities in connection with the two MGPs and sought indemnification for environmental damages. In response, the carriers issued broadly worded reservation of rights letters to LILCO, including the right to disclaim coverage based on late notice, and requested additional information regarding the MGP sites. LILCO provided additional information to the carriers in compliance with their request for information, but the carriers did not issue supplemental coverage position letters.

Later, LILCO filed a declaratory judgment action in New York state court seeking indemnity for damages arising out of the cleanup and remediation of the MGPs. Each carrier answered the complaint and asserted late notice as an affirmative defense – this defense had not previously been asserted as basis for a coverage disclaimer. On cross motions for summary judgment, the trial court found that the carriers had no duty to indemnify LILCO for the Bay Shore site because of LILCO’s late notice of an occurrence. But, as to the Hempstead site, the court denied the carriers’ motion because the reasonableness of LILCO’s notice was a disputed issue of fact. Further, the trial court rejected LILCO’s claim that the carriers’ late notice defense, as asserted for the first time in the answers to the complaint, was untimely. Following this decision, KeySpan received an assignment from LILCO to pursue the MGP claims and was added as a party to the litigation.

On appeal, the Appellate Division, Second Department, modified the trial court’s order by vacating the declaration in favor of no coverage for the Bay Shore site, but otherwise affirmed the order. In this regard, the Appellate Division noted that issues of fact existed regarding the carriers’ coverage investigation, including whether coverage disclaimers should have been issued to LILCO as soon as reasonably possible after LILCO provided additional information to the carriers as requested in their reservation of rights letters.

The carriers appealed to the New York Court of Appeals regarding whether the Appellate Division incorrectly applied the timeliness standard under section 3420(d)(2) when considering whether defendants had waived their rights to disclaim based on LILCO’s late notice of the MGP claims.

The Court of Appeals analyzed the plain language of section 3420(d)(2), its legislative history, and controlling New York case law interpreting the law, and held that the statute does not extend to environmental damage claims. The court noted that “[t]he environmental contamination claims at issue in this case do not fall within the scope of Insurance Law § 3420 (d)(2), which the Legislature chose to limit to accidental death and bodily injury claims, and it is not for the courts to extend the statute’s prompt disclaimer requirement beyond its intended bounds.” The court also mentioned, in a footnote, that certain cases that may have extended section 3420(d)(2) to apply to claims that were not based on death or bodily injury “were wrongly decided and should not be followed.” SeeEstee Lauder Inc. v. OneBeacon Insurance Group, LLC, 62 A.D.3d 33 (1st Dep’t 2009); Hotel des Artistes, Inc. v Gen. Accident Ins. Co. of Am., 9 AD3d 181, 193 (1st Dep’t 2004), leave dismissed 4 N.Y.3d 739 (2004); Malca Amit N.Y. v Excess Ins. Co., 258 A.D.2d 282,282 (1st Dep’t 1999).

For our readers who are keeping tabs on developments in the hydraulic fracturing (“fracking”) industry, you may be interested in our recent “news flashes” concerning the fracking industry in California.

The first is regarding a bill, introduced last Thursday, February 27th, that would halt all types of fracturing both on- and off-shore California until the completion of a multiagency review of the economic, environmental and public health impacts. SB 1132 would not only halt the use of high pressure injection of water and fracturing fluids into oil and gas reservoirs, the process most often thought of as “fracking” by the public, but would also prevent the use of acids to enhance permeability in “pay zones” to increase the flow of oil and gas into wells until the report is finished. To view a PDF copy the news flash, click here.

Just one day later, on February 28th, the Los Angeles City Council’s unanimously voted to draft a new municipal ordinance banning hydraulic fracturing and other well-stimulation activities, such as acidizing, within the city confines. The ordinance would place a moratorium on “all activity associated with well stimulation, including, but not limited to, hydraulic fracturing, gravel packing, and acidizing, or any combination thereof, and the use of waste disposal injection wells.” The ordinance would make Los Angeles the only oil-producing city in California to ban hydraulic fracturing. The moratorium would remain in place until the city verifies that hydraulic fracturing will not harm public safety or compromise drinking water. The ordinance must still be drafted and is subject to additional public input before being presented to the City Council for a final vote. To view a PDF copy of this news flash, click here.

In Federal Ins. Co. v. MBL, Inc., 2013 WL 4506149 (Cal. Ct. App. Aug. 26, 2013), the California Court of Appeal continued the judicial trend of restricting the insured’s right to insurer-paid independent counsel. The court held that a general reservation of rights, and a specific reservation of rights to deny coverage on the basis of the Absolute Pollution exclusion and to contend that the alleged damages did not occur during the policy period, do not create a conflict of interest between the insurer and its insured which would entitle the insured to independent counsel in an underlying action.

Pursuant to Section 2860 of the California Civil Code, if an insurer has a duty to defend and reserves its right to deny coverage regarding an issue that can be controlled by defense counsel appointed by the insurer, a conflict of interest arises between the insurer and the insured and entitles the insured to its own independent counsel, paid for by the insurer. The insured MBL, a supplier of PCE and other dry cleaning products, was named as a defendant in several third party complaints and cross-complaints in litigation instituted by the federal government for recovery of costs associated with remediation of groundwater contamination. Several of MBL’s liability insurers agreed to defend under a reservation of rights, and the insurers appointed defense counsel for MBL. MBL refused the defense counsel selected by the insurers, and contended that the reservations of rights entitled it to independent counsel of its own choosing at the insurers’ expense.

The court rejected MBL’s arguments and held that none of the three types of reservations issued by the insurers created a conflict of interest which would warrant an appointment of independent defense counsel. First, the court held that a general reservation of rights, pursuant to which the insurers did not expressly reserve their right to deny coverage under any particular exclusion (but preserved the insurers’ rights to rely on all their policies’ terms) did not create an actual conflict that gives rise to a right to independent counsel. The court reasoned that such a general reservation could do nothing more than create a theoretical, potential conflict of interest. Second, the court held that a reservation to deny coverage under an “Absolute Pollution” exclusion did not create a conflict because whether the exclusion applies is strictly a matter of contract interpretation and could not be controlled by defense counsel. Finally, the court held that a reservation on the issue of when the alleged damages occurred was irrelevant to the defense of the underlying claim and did not trigger a right to independent counsel, because MBL did not show how defense counsel could control that issue.

The case affirmed the holding of prior case law, first espoused in San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal. App.3d 358, that only an actual and significant conflict of interest – as opposed to a potential or theoretical conflict – entitles an insured to independent counsel under Section 2860.

For our readers who are keeping tabs on developments in the hydraulic fracturing (“fracking”) industry, we thought you would be interested in Sedgwick’s latest Hydraulic Fracturing News Flash regarding a recent proposal in California to regulate fracking, which can be viewed here.

Here are some recent developments that we are following in other states:

In New York, the Department of Environmental Conservation (“DEC”) has prepared a Revised Draft Supplemental Generic Environmental Impact Statement (“SGEIS”) on the Oil, Gas and Solution Mining Regulatory Program. The SGEIS pertains to issuing well permits for horizontal drilling and high-volume hydraulic fracturing for extracting oil and natural gas from the Marcellus Shale and other low-permeability gas reservoirs. Since making the SGEIS available for public review in September 2011, the DEC has drafted proposed regulations, which are available for comments from December 12, 2012 to January 11, 2013. At least until the regulations are finalized, it appears that the DEC’s moratorium on issuing well permits for horizontal drilling and fracking will continue.

In Pennsylvania, appellate review of the constitutionality of Act 13 of 2012 (“Act 13”), 58 Pa. C.S. §§ 2301 et seq. (signed into law on February 14, 2012), continues with the filing of appellate briefs to the Pennsylvania Supreme Court in September 2012. According to the General Assembly, Act 13 broadly reformed the laws that govern the development of oil and gas resources in Pennsylvania by establishing uniformity and promoting growth in the industry though the pre-emption of local ordinances that impose conditions or limitations on oil and gas operations. The General Assembly intended to allow oil and gas development as a permitted use in any zoning district, and mandate that restrictions placed on oil and gas development by municipalities be no greater than those placed on other industrial uses. A number of municipalities sought a declaratory judgment that Act 13 is unconstitutional, and requested that the Act be permanently enjoined. After the Pennsylvania Attorney General filed preliminary objections based primarily on standing and justiciability grounds, the municipalities filed a motion for summary judgment. On July 12, 2012, the Commonwealth Court issued a decision that granted in part and denied in part the summary judgment motion, and in part sustained the Attorney General’s objections. Significantly, the court declared a section of Act 13, which provides for uniformity of local ordinances, to be unconstitutional. Cross-appeals were filed by the municipalities and the Attorney General.

In New Jersey, a one-year moratorium on fracking signed by Governor Christie is set to expire in January 2013. However, a New Jersey assemblyman is currently sponsoring legislation that would extend the ban on fracking until the state Department of Environmental Protection reviews the federal Environmental Protection Agency’s study on the effects of fracking, which may not be out in final form until 2014.

In Scottsdale Insurance Co. v. Pursley, Slip Copy, 2012 WL 3553405 (11th Cir. Aug. 20, 2012), the U.S. Court of Appeals for the 11th Circuit rejected an attempt to limit the application of a commercial general liability policy’s total pollution exclusion to traditional, environmental pollution.

In Scottsdale, Sheryl Simpson-Jones (Simpson-Jones) and her husband, Christopher Jones (Jones), hired Richard Pursley to repair their boat. Pursley completed the repair, but neglected to cover the exhausts for the starboard engine after he was done. After the Joneses retook possession of their boat, Jones turned on its generator to operate the boat’s air conditioner. The generator and starboard engine shared a common exhaust vent, and carbon monoxide filled the boat’s cabin, kitchen, and sleeping quarters, where Jones had fallen asleep. Jones died of carbon monoxide poisoning, and Simpson-Jones filed a wrongful death claim against Pursley.

Scottsdale had issued a commercial general liability policy to Pursley covering liabilities arising out of his mobile marine engine repair business. The policy, however, contained a total pollution exclusion that precluded coverage for “‘bodily injury’ … which would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ at any time.” The policy defined “pollutants” to mean “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” Scottsdale filed a declaratory judgment action against Simpson-Jones in Georgia federal district court. The court, in granting Scottsdale’s motion for judgment on the pleadings, determined that the total pollution exclusion in Scottsdale’s policy precluded coverage for Jones’ death. Simpson-Jones appealed, arguing that the district court’s application of the exclusion disregarded the historical purpose of the pollution exclusion to preclude coverage for traditional environmental pollution. Rejecting Simpson-Jones’ argument, the 11th Circuit noted that the Georgia Supreme Court held in Reed v. Auto-Owners Insurance Co., 667 S.E.2d 90, 91 (Ga. 2008), that there was “no language in the policy supporting restricting application of the exclusion to traditional environmental pollution.” Therefore, the 11th Circuit affirmed the district court’s grant of Scottsdale’s motion for judgment on the pleadings.

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